Colombia central bank ups growth view, hikes rate

May 1, 2011 - 0:0

BOGOTA (Reuters) - Colombia’s central bank raised its 2011 growth forecast on Friday and increased interest rates for the third time this year but did not take any new measures to curb the strength of the country’s currency.

Latin America’s fifth-biggest economy is among regional economies such as Brazil, Chile and Peru that have raised interest rates to fight inflation spurred by higher fuel and food costs.
“The adjustment to a less expansive monetary policy must continue,” the central bank said in a statement, announcing it was raising its benchmark interest rate by 25 basis points to 3.75 percent, a move widely expected by the market.
Colombia made its first rate hike in two-and-a-half years in February, followed by another in March in what the bank calls a gradual tightening cycle.
The central bank said on Friday that inflation expectations over a year were within a target range of 2 to 4 percent but long-term inflation expectations were above it.
The bank raised its 2011 economic growth forecast to between 4 and 6 percent, up from a previous estimate of 3.5 to 5.5 percent. Growth of 6 percent would be the highest for Colombia’s economy since 2007.
“The bottom of this range takes into account the possible negative effect on economic activity of the rainy season. Even considering this, it is likely the level of output will be close to its potential,” it said.
Downpours and floods have hammered the country since last year -- killing over 400 people, leaving 3 million homeless and causing billions of dollars in damages in what the government calls the worst natural disaster in Colombia’s history.
-----------------Currency talk
Recoveries in many countries after the world financial crisis have prompted many central banks to start to bring interest rates closer to normal levels and to curb credit.
By contrast, the U.S. Federal Reserve this week signaled it is in no rush to scale back its support for the economy.
Near-zero interest rates in rich countries have been blamed for big inflows into high-yielding emerging markets, pushing up the value of their currencies.
In Colombia, the peso COP=RR has surged 10.4 percent over 12 months, hitting its highest level since mid-2008 on foreign direct investment, local companies taking advantage of low interest rates abroad and dollar inflows to pay taxes.
Colombia is experiencing a boom in investment, especially in the mining and oil industries, as security has improved after a government crackdown on rebel groups.
Confounding some expectations among investors, the bank did not take any new measures to curb the strength of the peso currency on Friday but said it was maintaining its policy of buying at least $20 million a day until mid-June.
“This is consistent with recent senior official statements rejecting the adoption of capital controls while reiterating the belief in the current set of policies to deal with the FX dynamics,” said Alberto Ramos of Goldman Sachs.
Finance Minister Juan Carlos Echeverry told reporters that pressure on the peso in April -- when it surged nearly 6 percent -- had been expected due to scheduled tax payments.
Echeverry said the government would not bring any more dollars into the country this year to take pressure off the peso and would create a fund of up to $1.2 billion outside the country to make a debt payment in January next year.
“The government doesn’t have the need or the intention to bring one single dollar into the country for the rest of 2011,” said Echeverry, who is a member of the central bank’s board.